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As much as I like to quibble with outrageous tech stock valuations, every now and then a stock comes along that even I have to admit appears to have fundamental value underlying its skyrocketing price. Vignette Corp. (VIGN) looks like one of those stocks.
It's true that since October the dizzying rise in its shares from less than 50 to a recent 268 smacks of typical high-tech volatility. But if you're willing to bet on technologies that have a chance to set a standard for the future, Vignette is a reasonable choice. Never mind that it's only $3 below the top of its 52-week range. If Vignette continues to grab customers at the rate it has recently, it may have a chance to build itself an Internet-related franchise to rival Microsoft's in operating system software. The idea is that Vignette's software -- which is used to manage a Web site's data and information, then publish it to the Net -- will become the platform of choice for building Web sites. And analysts expect that market to hit $13 billion by 2003.
No wonder the company is willing to lose some money in 2000 in order to sign up customers. "Right now, we're in a land grab to maximize the adoption of our platform," says Vignette's chief financial officer, Joel Katz. Much of this growth will come from what Katz calls the "Vignette Economy": Systems integrators, solution providers, and independent software vendors (ISVs).
"KEY DOT-COMS."
These are business partners that help promote Vignette's software. The first group are consultants such as Andersen Consulting, CSC, PricewaterhouseCoopers, Sapient, and Viant, all of whom help customers install Vignette products. Its solutions partners -- among them Razorfish and Sybase -- buy Vignette software, mark it up 25%, and sell it along with implementation services to Web sites. These two groups account for about 50% of Vignette's sales. Vignette also has partnerships with ISVs such as IBM and Microsoft, which build applications on top of Vignette's software platform. Vignette has already trained 800 staff at these partners to implement its software.
"That's why you see investors getting so excited about us," says CFO Katz. "[Through these partnerships], we're adding Fortune 2000 and key dot-coms to our customer base.
"Of course, a great customer list doesn't eliminate the chance that a genius at a dot-com, or a competitor, could change the direction of so-called content management software. But for now, Vignette -- which analysts believe could have 7% of the total $4.5 billion Internet-relationship management market by the end of 2000 -- is the company to beat. In fact, Vignette is also broadening its product line via acquisitions, most recently of DataSage and Engine 5. The former, acquired for a controversial $700 million, makes software that can analyze user data on a Web site to create demographic profiles or targeted marketing campaigns, for example. Vignette believes the investment was worth it to get this important e-commerce tool. A very small acquisition, Engine 5 is a company that makes Java-based transaction software for buying and selling online. Vignette also has another important e-commerce application in its stable of products -- personalization software that lets Web-site visitors dictate which bits of information they want to use.
Right now, the industry is young enough that no two competitors look alike. Vignette has direct competition for certain segments of its product line, including Open Market's Future Tense in content management and Broadvision in personalization and analytics. Kana, which recently bought SilkNet, competes largely in customer-service software. None of these competitors overlap overwhelmingly now, but all three are building businesses that may eventually look very similar. As the industry matures, others will probably leap into the fray, and there could be a shakeout. "We'll see 60% to 70% growth from here for the next three years. Usually when a market gets that big, it will scale so that only two or three survive," says Richard Davis, a managing director and analyst at Needham & Co. "That's why it's so important in the beginning to grab market share."
PACKAGED SOLUTIONS.
Vignette is making every effort to ensure its longevity. Although its systems have been criticized for being too proprietary, Vignette made significant strides in 1999 toward making its software compatible with other programming languages, from Java to XML. Vignette has also tried to package its products in components, so that Web-site systems designers can use just the pieces they need. The company books software license fees from a client -- with their gross margins of 90% to 95% -- only if its product has been successfully installed and is operating. It books implementation fees, which occur when a Vignette product is initially purchased, separately: Those can run from two to five times the ongoing licensing fee but have a gross margin of only 30%. "Our method of revenue recognition creates a more predictable revenue stream and aligns our success to our customers'," says Katz.
Clients have been responding to Vignette's efforts. In the fourth quarter of 1999, Vignette added 125 customers to its client base, for a total of 518. So far the first quarter has been slower, although it still has considerable momentum in building its customer base. In the first two months of 2000, it added 27 customers, putting it neck and neck with Broadvision for the largest customer base in the business.
Such a large customer base guarantees future revenues as Vignette introduces new products and upgrades. And the company is planning to offer packaged products by the end of the summer, for easier Web-site building. "We're moving toward an applications suite," says Erik Josowitz, vice-president for product strategy. "By 2001 we will have a complete product-set by taking the best practices we've developed in implementing our software for our current customers and packaging it with a common functionality." While Josowitz expects the company's core clients to continue to be those in financial services, telecommunications, retail, and publishing, he's betting that two years from now, packaged solutions that require less spade work from the customer will be the norm.
EUPHORIC.
Wall Street is wildly bullish about Vignette's prospects. After the company reported fourth-quarter revenues of $41 million -- beyond the Street's initial predictions for the entire year of 1999, analysts' opinions ranged from thrilled to euphoric. Needham's Davis says the shares are worth $300. "There is upside potential in the stock," agrees Ian Morton, analyst at Chase H&Q. "If you look at the company that is most broadly comparable, Broadvision, it's trading at around 80 times 2001 revenues, while Vignette is still at less than 50 times 2001 revenues.
"Estimates of revenue and earnings are also pretty rosy, with most analysts expecting profits in 2001. Like many of his colleagues, Davis is projecting 2000 revenues of $200 million, up from $89 million last year, and 2001 revenues of around $300 million. He expects Vignette to show an operating loss of about $593,300 this year, but turn an operating profit of $11.3 million, or 19 cents a share, next year. While Morgan Stanley Dean Witter's Mary Meeker has the same revenue estimates, she anticipates a (pro forma) operating loss of $12 million and net loss of $10 million. Chase H&Q's Morton has the same revenue estimates, but anticipates losses of $1.8 million this year, and earnings per share of 20 cents in 2001.
As with all software companies, the main investment risks lie in Vignette's ability to keep ahead of ever-changing technology and outrun the competition. "As each new standard gets added to the list (HTML, Java, DHTML, XML, ICE), software vendors have to react and incorporate new features as quickly as possible to stay with the pack," wrote Morgan Stanley Dean Witter's Meeker in a Jan. 27 report on the company. "It will be important for Vignette to continue its technology leadership in order to protect its market position." By that standard, Vignette's position isn't in imminent danger.
Margaret Popper covers the markets for BW Online
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